February 20, 2011

URGENT – Any small business with a real estate mortgage maturing before 12/31/2012 should be aware of a recently announced SBA program to assist in refinancing those loans. Applications will be accepted beginning February 28, 2011 for this program which is being administered by SBA under the 504 program. It is only authorized to take applications through September 27, 2012. Please note these comments from the executive summary contained in the announcement:

“Market research shows that a large percentage of commercial mortgages outstanding are set to mature within the next few years, particularly those held by community banks. As real estate values have declined, however, even small businesses that are performing well and making their payments on time can have a hard time refinancing these loans and may need to restructure their debt.

Under the Small Business Jobs Act, the SBA will implement a temporary program—authorized until Sept. 27, 2012—allowing small businesses to refinance eligible fixed assets in its 504 program without requirement of an expansion, as is the case with typical 504 loans. This program will provide small businesses the opportunity to lock in long-term, stable financing, as well as protect jobs.”
Here is the link to the announcement on SBA’s website http://www.sba.gov/content/504-loan-refinancing-program

I am available to assist any business in working with a CDC/lender to obtain one of these loans.

October 11, 2010

As many of you know, I work for one of the most prolific development companies in Northeast Ohio. Unfortunately, the last few years have been tough for commercial real estate not only here but all over the country. Our related construction company has been able to grow, but only because we have some great customers who are expanding and building elsewhere in the country. However, for most people looking to find space in Cuyahoga and surrounding counties, unless you have a specialized need, there are plenty of very inexpensive buildings, both to rent and buy. We have been approached by sellers requesting that we buy properties that we built within the last 10 years for significant discounts, in some cases 50% or more.

The bright spot in all of this is the MidTown neighborhood of Cleveland. We have been engaged with the local CDC, MidTown Cleveland, Inc. as well as the City of Cleveland in the development of a 128,000 square foot technical/research building located at 69th and Euclid. This new building will be the first new construction in MidTown in many years. To get this project off the ground has been truly an education and a indicator of the way things are going to be for some time to come. I say this because it is a speculative building. We do not have any tenants yet but believe in the market and the prospects for the area. A recent study commissioned by the major stakeholders in the MidTown area concluded that because of the growth in the medical sector concentrated on the RTA Health Line, there is a desperate need for “move-in-ready” space for the companies that are being started by the two major hospitals and supported by BioEnterprise, JumpStart, NorTech and the other early stage capital companies. We hope to capture some of these companies with our building.

Because of the recent financial crisis, we can’t use conventional financing sources. Banks are very slowly coming back into the real estate lendng market, but none of them will finance a “spec” building. They aren’t allowed to by the regulators. And so, this project could not be built without the assistance of the federal, state and local governments. The cost of construction has increased over the past 5 years and even though the recession has brought those costs down some, the rents that can be charged in our region have not kept pace. Land prices have increased because of the hospital expansions and related improvements. The assistance we are receiving in the form of a low-interest loan from the City, federal New Market Tax Credits and the State Job Ready Sites grant all help to subsidize the cost of the project so that we can bring down the rents to the market.

In my next post, I’ll talk about some of the hurdles we have had to face and how our partners have helped us overcome them.

February 20, 2009

With all of the financial and economic turmoil going on, organizations and individuals alike are scrambling to figure out what to do. The federal government just passed a $787 billion “stimulus” bill as well as another $75 billion “housing” bill. This is on top of the probably $2 trillion already committed to banks and other financial institutions by the Federal Reserve and Congress. It seems that practically every type of organization is looking to the government to solve their problems. The automakers have made huge mistakes for years in terms of customer satisfaction and quality but the government is supposed to fix it. The banks continue to ask for and get far more money than is comprehensible to those of us on Main Street. States are looking to use the stimulus money to plug holes in their budgets. Ohio’s governor is proposing to use several billion dollars in this fashion.

These actions seem in part to be out of desperation because no one wants to raise taxes, especially in an economic downturn. But is spending the stimulus money to plug holes in a budget what the money is intended for? No. The notion here is that by distributing money to state and local governments and federal agencies, these organizations can spend the money on projects which will create jobs, even if they are temporary construction jobs, that will allow the employed to go out and spend to boost the economy. This would seem to make sense. I know that as long as I’m feeling good about my job, I’m more inclined to buy something that I might otherwise defer.

What about you? What is your plan to cope with your situation? Unlike the government, we don’t have a seemingly inexhaustible source of money. After all, if they run out they can just print more. We however, if we are smart, live within the confines of our incomes. It is apparent however, that many of us are not so smart, as the dramatic increase in personal bankruptcies indicates. The ease with which we can pull out the plastic and get what we want can become very alluring, that is until we get the bill. I knew that credit was becoming too easy when McDonald’s started accepting credit cards.

Parents, it is vital that you teach your children something about finance. It is not too early to start. Talk to your child about how you work to earn the money that pays for the house and food and everything else that you need to live. Show them your paycheck, tell them how much is taken out for income taxes, show them how (hopefully) you are saving some of your pay by investing in your company retirement plan. Let them in on the family budget. If they get an allowance based on chores, make sure they understand that if they don’t do the chores they don’t get the money. You don’t keep your job if you don’t do it, is a lesson that should be taught young. Go to http://www.feedthepig.org to learn more about financial literacy for children and encourage your schools to offer Junior Achievement or some other program that teaches children about their place in te community. Help them to understand the power of advertising and learn to withstand it yourself. I read a suggestion once about how to decide if you should buy something or not. Make a list of the 2 or 3 things you want most. Put it on the refrigerator. Revisit the list each month. If the item is still on the list after six months then consider actually purchasing it.

My parents did none of these things. I did not save anything as a teenager. I worked all summer one year mowing the grass in the projects in Akron. I remember I made $2,500 and had nothing to show for at the end of the summer. As I noted in my last column I have a wise wife who manages our household well. Fortunately we are able to save some money and are still enjoying some frills. But it is harder than it used to be and we are carefully watching our money so as to make wise use of our resources.

For those of you that have lost their jobs, I’m sorry for that. I hope that things will work out for you. Don’t be afraid to use the social safety net that exists. Americans like to think of themselves as self-reliant, pull yourself up by your bootstraps and go for it types. Unfortunately, it doesn’t always turn out that way. Sometimes we need help and there are sources of help that you have already paid for. You have paid your taxes for years and those taxes have supported the social welfare programs, there is nothing wrong with getting some of your money back. Go back to school and get more training or learn a different profession altogether. Apparently there are a large number of middle-aged men going to nursing school. In fact, the medical field is a growing sector of the economy and nurses and medical technicians are in high demand.

I don’t know what your plan is, but I do know you should have one. Do the best you can to control your spending and hope that your boss is too. Do the best job you can at work, it’s no guarantee, but a good worker is harder to layoff than a bad one. Save as much as you can, remember to “pay yourself first” by setting aside some money for emergencies. Remember too that you should have savings outside your company retirement plan. That money is supposed to be for the future and taking it out prematurely has huge income tax consequences that really blunt any benefit you think you’ll get. Plus, by withdrawing money, you prevent future contributions for a period of time. Whatever your plan is stick to it for the long-term. You never know, it just might work.

January 20, 2009

As human beings we tend to try and find someone to blame for our problems. When something goes wrong with our lives it is easier to find a cause outside ourselves than to evaluate our potential responsibility for the troubles. I don’t want to minimize the Bible principle that “time and unforeseen occurrence befall us all” however, I think that often if we took a step back and objectively looked at the situation, we would find that we did something that was, if not the direct cause, at least contributed to the situation.

In my last column, I talked about the current disaster in the housing markets. In this instance, there are a lot of culprits and certainly an abundance of blame to go around. The government adopted what is ostensibly an admirable goal, increase home ownership by easing the eligibility rules for government insured loans. Unfortunately, they did not foresee the creative ways that people in the lending business and all of its associated parts would come up with to profit from the government’s largesse.

It seems that everyone got in on the act. The first line was of course the banks, mortgage brokers, title companies, appraisers, home inspectors, credit agencies and surveyors who were engaged as a result of the loan. The homebuilders and all of the tradesman and suppliers who contributed to the construction process were also primary beneficiaries as the purveyors of the product that everyone wanted. Then too, the furniture retailers, appliance dealers, electronics stores, art dealers and so on, after all who wants to move into an new house with all your old stuff.

So a tremendous boom in housing was created that resulted in prosperity for all. The stock market went crazy as the US economy went on a tear. We were spending money like it was going out of style and as a result the rest of the world was growing too. China, India, Mexico, Indonesia all benefited from US growth and spending. The outlook was actually somewhat scary since the speculators foresaw continued demand and drove up the price of commodities like oil, copper, steel and other metals. The rising price of oil caused a strain on food crops that could be used to make fuel. The price of corn and other oil bearing crops increased causing increases in food since corn and soybeans are ubiquitous in our food supply.

In the housing market, subdivisions popped up everywhere. City planners were having a hard time regulating the growth and “Sprawl” was on the lips of environmentalists. In hot markets like Florida, Las Vegas and the Southwest, condominiums in good buildings were being sold two or three times before they were even finished. People were putting down deposits on condominiums with the expectation of never moving in. They were in the building solely to flip the unit at a profit.

Just like any good Ponzi scheme the early ones made a lot of money. In fact they made so much that it encouraged a whole lot of folks to get into the act. Ordinary people with no experience whatsoever were encouraged to invest in real estate and many of us did. I say us because I’m one of those people who bought a house to get into real estate ownership. Actually I bought two, the first one I still own. It is rented to the woman who lost it. She got sick, fell behind on her payments and had to file bankruptcy. The bank sold the house to me at a loss. Since she was still living in it, I asked her if she wanted to rent. She did and she is. As she works her way out of her bankruptcy, I’d like to sell her the house.

Because I had a good experience the first time, I bought another house. This one was in Brooklyn Heights. The neighborhood was one of the best for resales in Cleveland. The houses had been increasing in value, the neighborhood was stable and safe. I don’t know what the reason was, but this house too was a foreclosure. The bank took an $80,000 hit when they sold it to me. It was not in bad shape, just needed some updating. I bought it in June of 2007, shortly thereafter, houses stopped selling in that neighborhood. I fixed it up as I had planned, but by the time I was done, it was nearly impossible to get anyone to walk through it. I had originally planned to mark it up about $20,000, by the time I sold it I broke even. I consider myself extremely fortunate that I was able to sell it and not lose my shirt. Ultimately, the house sold for $40,000 less than the bank I bought it from had it on their books. Just next door was a nice house, fully furnished, that was listed for less than mine that was still for sale when I closed the sale.

Did I make a bad decision in getting the second house? Perhaps. It seemed like a good investment at the time. I had a partner who was going to do the work and it was my credit that bought the house. We had a good arrangement, but as in anything where you don’t have a lot of experience, things go wrong. Inevitably, renovations take longer than they should. Subcontractors don’t always perform up to expectations, more money needs to be spent. The economy falls around your ears. After that my wife and I decided it would be prudent to not take on anymore of this type of risk. We did not have the time or the financial wherewithal to carry another house should things turn sour.

What about all those folks that had deposits on condos when the bottom fell out? If the building was done, they were legally obligated to close. If it wasn’t done they may have just lost their deposit. Either way, they were significantly worse off for having made the decision to invest their money in real estate.

What about my renter? Did she make a bad decision? I don’t think so. She got sick and didn’t have a cushion to carry her. In our economy many people almost have to have two incomes to survive. Saving for many seems to be out of the question. I am fortunate to have a wife who is prudent and wise when it comes to managing our household. She tries to spend our money frugally and saves money also. We have examined our spending and reduced or eliminated bills. Which is not to say that we haven’t made bad financial choices. I made an investment in a stock picking class which turned out to be a major waste of time and a lot of money. I also spent a week in California at a web authoring seminar. I was going to be a “web site designer”. I came back from that week several thousand dollars poorer but knowing that I was not going to become a web designer. Maybe it was a week well spent since it disabused me of a foolish notion.

I feel bad for someone that has lost their home. It must be terrible to experience. But in reality, some of these folks never should have bought a home in the first place. The New York Times ran a story about some mortgage brokers and the lengths they would go to close a loan. One man’s verification of income was a photograph of his pickup truck with his name on the door as a landscaping business. This man bought a house that far exceeded his means using a loan that allowed him to pay less than the interest accrual. Every year his principal balance went up due to the negative amortization.

Whose fault was it when he and his family lost their home? The mortgage broker? He had some responsibility for putting the man into a loan he couldn’t possibly afford. The realtor? She too had some responsibility for putting the notion that this man could live in the big house. What about the man? Did he have some responsibility? I say yes. Just because a thing is possible doesn’t mean it should be done. Perhaps he didn’t understand about negative amortization or the other financing mechanisms used to get him in that house. But I think that just maybe if he had stepped back, looked at the neighborhood, looked at the price of the house, looked at his paycheck, just maybe he would have realized that he was in way over his head. That just maybe the whole mess was his fault.

January 10, 2009

The past year has taught me a few things about finances and about people. Probably the biggest lesson is that just because someone is rich doesn’t make them smart. Bernard Madoff swindled some of the richest people in the world with history’s largest Ponzi scheme. He got people to invest because he promised and seemingly delivered consistent returns year after year regardless of market conditions. He used the cachet of exclusivity to get more money. You could only get in if you had more than $20,000,000, you needed to be introduced and you had to take at face value his “secret” method of investing.

Of course, now that he has been exposed, the hindsighters are coming out of the woodwork. There are several individuals who actually did write the SEC questioning his results and other advisers who told clients not to invest with him. Mr. Madoff’s supposed investing results could not be verified by other investment managers, Mr. Madoff’s firm was audited by a small CPA firm, he cleared the trades through his own firm, prepared his own statements and was very secretive about his methods.

And yet despite all of this and probably in some cases against their better judgment, people invested with him. Why? In many cases, it was because their friends spoke highly of him and shared the same religious background. They belonged to the same country club in Palm Beach. In some cases, it was because the folks that they trusted originally with their money recommended him and claimed that they did background checks and conducted ongoing monitoring of the money. In some cases, people didn’t even know they were invested with him. There are even unattributed reports that some investors “knew” that he was doing something wrong but figured that they were benefiting from it so a “don’t ask, don’t tell” policy was best.

Those of us who are not rich may be tempted to sit back and gloat about the foolishness of the rich. Don’t. The poor and the not-so-rich have their own foolishness as well. The lottery is a case in point. I was listening to a report on NPR the other day about lotteries. The reporter was interviewing lottery officials from around the country and the person who was in charge of the Powerball lottery noted that volumes did not pickup until the jackpot hit $200 million. There seems to be a general opinion that anything less isn’t worth it. The fact of the matter is that the odds of winning are the same no matter how many people play, but normally rational people will take the chance if the number gets big enough, perhaps thinking “what the heck I just might win.”

Those of us who are not rich also fall victim to Ponzi schemes. Ponzi was a promoter who sold stamps and promised a return on the stamps. It was just as crazy as Bernard Madoff but thousands of people bought into the scheme and lost money. The allure of the scheme is the ability to get your money back and also to get a huge return. I remember some year’s back being at dinner with a professional I worked with. Her husband started talking about an investment that he had been offered. If he put in $2,000 he would get his money back in a month plus a 50% return. Being the smug professionals that we were, we knew that it was a Ponzi scheme, that the money he would get back would be from his friends or someone else’s friends who had been drawn into the scheme, but later. We both commented on how terrible it would be to betray our friends by drawing them into a scheme that might lose them all of their money.

And yet, these kinds of schemes flourish. The entire country of Albania was destabilized by a huge Ponzi scheme that was perpetrated shortly after the fall of communism. Recently, in Colombia, riots broke out when the government of the country shut down another such scheme. The riots were not against the promoter but against the government for stopping him. The promoter was viewed as a folk hero because he was bringing prosperity to ordinary people who had been let down by the government.

Are the folks in Palm Beach any different than Latin American peasants? Not in this case. They all lost their savings and in some cases are forced to sell their possessions in order to pay the bills. A pawnbroker in Palm Beach has seen increased business from folks who directly attribute their problems to losses from Madoff. He has had folks bring in prized jewelry and in one case a yacht. Lives have been destroyed by this man and others like him who have stolen the dreams of folks who trusted them.

Before you breathe a sigh of relief that you were not caught up in the Bernard Madoff scandal, you almost certainly have been affected by another feat of financial wizardry gone wrong. I suspect that if you are like me, you have a 401(k) or IRA that is invested in the stock market, usually via mutual funds. I suspect that you may also like me dread the quarterly release of your performance results. The world financial markets have taken a huge hit from the crisis in the US housing market. In response the US govt and Congress have thrown billions perhaps trillions of dollars at the problem in the hope that something will stick and stop the downward plummet of the financial markets. No one knows what to do because the problem is so big and so unprecedented that they are all guessing. Perhaps the only person who has a notion of what might work is the chairman of the Federal Reserve, Ben Bernanke. Reportedly he is a history buff and one who is particularly interested in that bleakest financial period in US history, the Great Depression.

The current troubles could have been prevented if the basic principle that in order to borrow money, you had to have the ability to pay it back was followed. Instead, in some cases the ability to breathe was the only real criteria applied to granting of loans. How was this made possible? Through another bit of financial sleight of hand. Through logic that only Wall Street could come up with, it was determined that taking a bunch of loans which had no real possibility of being repaid and packaging them together suddenly made them okay and worthy of an investment grade rating. Then, in a further feat of magic, slicing them into component parts and selling these to mutual fund managers and hedge funds, they became part of every American’s financial portfolio whether they knew it or not. To further compound the problem, these wizards bought insurance on the loans from companies who had no business selling insurance since they had nothing to back up the claims when they were made.

So when the inevitable loan defaults started, the investors that had bought the insurance started making claims, the companies that had sold the insurance and had paid out huge bonuses to their principals rather than keep capital just in case started defaulting on their obligations and filing for bankruptcy. Everyone who had bought similar insurance started checking out the financial viability of the companies that had sold them the insurance and realized that they were insolvent as well. So, AIG, the insurance company that had sold the most of these kinds of policies turned to the federal government after every other possible suitor had turned it down. Deemed “too big to fail” the feds lobbed some money at the problem, a lot of money. It started at $85 billion and has been added to since then.

Bear Stearns, Merrill Lynch, Lehman Brothers, Wachovia, WaMu, IndyMac have all gone bankrupt or been sold in a shotgun wedding. And still the money keeps flowing from the federal government and still my 401(k) keeps going down.

What can you and I do about this? The fact of the matter is very little. Your 401(k) advisor, if he’s like mine, is advising you not to stop investing, after all we are buying more shares cheaply. He’s probably right, but it sure seems like throwing good money after bad, doesn’t it?

Hopefully, the government will start to do the job it’s supposed to do which is watch over those things that are too big for smaller governmental units or individuals to handle on their own. Like air traffic control and interstate highways and protecting ordinary folks from financial wizards who create products that make absolutely no sense.

I know that all of this will result in a lot of Congressional hearings, some of them have happened already. New regulations will be enacted which will prevent the same kinds of things from happening again, but there are now thousands of Wall Street wizards out on the street looking for something to do. Since they don’t have practical skills like plumbing and carpentry, they will continue to try to come up with the “next best thing” that will make them rich. Eventually someone will. Markets will soar, the little guys will jump in because they don’t want to miss out, after all, the rich folks are getting richer by the minute. In the end, it will all fall apart again and we will take a step or two backwards. Just hope you are not on a fixed income when the backwards step happens.